OUR ECONOMY - DERIVATIVES - POISON

from: PLPazucarero@aol.com_________________________________

FRIENDS:

We are going through some very difficult economic times in our beloved country,
the United States of America. Having for so many years worked as an insider in the financial engine of the world, Wall Street I have been able to experience many cycles of good and hard times in the economy.

Having been very confused about the origins of the worst shrinkage of private investment and financial liquid assets that have affected our society during the last few years I've been able to find a possible answer to this dark history.

I was able to survive and thrive in the difficult world of physical commodity trading, so a lot of people have asked me what has happened to the economy, thus I try to give some explanation.

Following is a description of DERIVATIVES, these financial instruments are in my opinion, the original culprits for the excessive speculative actions carried by an uncontrolled mix of large and small financial institutions and individuals all over the world, these unwise actions in my opinion are the reason for the collapse of the world banking system, and thus the shake out of world economies.

Derivatives

Derivatives are financial instruments that were created to reduce risk, and their use on Wall Street is known as hedging. In recent years, however, as their prevalence and complexity ballooned, they have created new kinds of risk and have played a major role in the meltdown of the world's financial system.
Their name comes from the fact that their value “derives” from underlying assets like stocks, bonds and commodities.
One of the easiest ways to understand derivatives is to consider an early example -- traders in Chicago in the 19th century buying corn futures. A contract that guaranteed the a certain amount of corn at a certain price at a date in the future helped reduce the risk the trader faced, since he would have some protection if prices rose. But that future also had a value in and of itself, one that rose and fell with the price of corn -- when prices went up, a contract for corn at a cheap price was worth more. So futures were traded as avidly as corn.
The most common types of derivatives are futures; forwards, which are futures traded outside of a regular exchange; options, which are the right to buy or sell something at a specified date and price; and swaps, contracts involving an exchange of assets or payments.
In recent years, a bewildering variety of derivatives have been developed. Two types that have played a central role in the recent turmoil are mortgage-backed securities, whose value depends on the value of the mortgages, which depends on how many of them are being paid off, and credit default swaps, which are in essence a form of insurance policy, and whose value swings with the fiscal health of the transaction or asset it is written to cover.
The derivatives market today is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them.
The contracts allowed financial services firms and corporations to take more complex risks that they might have otherwise avoided — for example, issuing questionable mortgages or excessive corporate debt. The fact that they can be traded in one sense limited risk but also increased the number of parties exposed when problems emerged.
Throughout the 1990s, some argued that derivatives had become so vast, intertwined and inscrutable that they required federal oversight to protect the financial system. But the financial industry lobbied heavily against such measures, and won backing from important figures, including Alan Greenspan, chairman of the Federal Reserve from 1987 to early 2006.
Saludos,

PLP